MacroVoices #542 Luke Gromen: As The Conflict Turns

Luke Gromen issued a mea culpa to clients for being wrong on the oil price response to the Hormuz closure, though he was correct that the conflict would last far longer than consensus expected. As of July 21, 2026, the Strait remained closed and crude oil was trading near 88.43 dollars, up roughly 1300 basis points week over week. Gromen's core error was underestimating China's ability to absorb the disruption. China shifted 1.4 million barrels per day of oil demand to EVs in the first half of 2026 alone and reduced overall oil demand by 3 to 4 million barrels per day during the closure, while its exports to the world rose 27 percent year over year in May and corporate profits were up 19 to 20 percent year to date.

China effectively shorted itself oil to prevent a supply catastrophe across Southeast Asia and the global south, generating political goodwill while demonstrating that Chinese solar panels, EVs, and battery arrays can reduce dependence on dollar-priced oil. CIPS yuan trade volumes hit an all-time record in May at approximately 14 trillion yuan, equivalent to roughly 2 trillion dollars, and China has large yuan swap lines with essentially every country in the world except the United States. Gromen argues the longer the conflict continues, the more countries make alternative payment arrangements settled in yuan and gold, which he views as strongly positive for gold prices.

Gromen's strategic framing is that the US being at war for 23 years since the 2003 Iraq invasion has benefited China at the expense of American relative power, and that China will continue to prolong the current conflict because a longer US war is strategically beneficial to China. China has continued to constrict rare earth exports, is not abiding by trade agreement terms, and implemented helium export bans despite helium prices being at floor levels. Gromen interprets the helium ban as a signal that China believes Qatar may go offline and that the US may attempt to weaponize helium against Chinese chip production. He also notes that bad news reportedly does not reach Trump based on multiple independent sources, and that the US military told leadership it does not have the weapons to sustain the conflict.

Every major bond market globally is straining to the upside including the US, Japan, Europe, the UK, and Korea, while China's bond market is not. Within approximately three weeks the US, UK, Germany, South Korea, and Japan all simultaneously moved toward borrowing to build out defense industrial bases. Japan, Germany, and South Korea have historically been creditors of the global economy and are now turning into borrowers. Gromen argues this defense spending buildout will be inflationary because China, the world's largest defense industrial base, will be excluded from supply chains. He predicts one major Western nation will eventually implement yield curve control and others will follow, causing all their currencies to weaken together against the yuan and gold, with Western equity markets rising sharply in local currency terms but falling in gold terms. He adds that Bitcoin would also perform well in a yield curve control scenario, though he notes uncertainty about whether Powell might attempt to fight inflation by hiking rates first, which could itself trigger a bond market crisis.

Gromen argues the Trump administration has a coherent strategic plan for monetary restructuring but is executing it poorly at the tactical level. He draws a parallel between China's stated goal since 2009 of replacing the Treasury bond with gold as the neutral reserve asset and Treasury Secretary Bessent's speech stating the US is moving to Hamiltonian economics, which involves high tariffs and a neutral reserve asset that floats in all currencies. He is sharply critical of Bessent's earlier claims that the US as debtor nation holds all the leverage over China and that oil could be brought to 50 to 60 dollars while production grew by three million barrels per day equivalent, both of which he says were false or should have been known to be false.

For the prior five months the pattern was war hot equals gold down and war off equals gold up, but as of the recording week the pattern shifted to war on plus rates up plus oil up plus gold up simultaneously, which Gromen treats as a meaningful regime change. Gold has been the United States' number one export in eight of the last ten months, exceeding pharmaceutical preparations, jet engines, and oil. Gromen prefers gold over oil as a trade because it offers similar upside with less volatility. Patrick Suresna notes gold corrected roughly 30 percent from peak to trough over approximately six months and is now about 1,600 dollars off its highs, with the 4,000 dollar level acting as support, while CFTC data shows large speculators near the bottom of their one-year positioning range and small speculators did not sell a single contract during the correction, indicating unusually sticky positioning.

Crude oil advanced 35 percent off its lows in three weeks, returning to the 90 dollar handle and catching many traders off guard after reversing from a forced long washout in June into a full short squeeze. The latest COT report shows large WTI speculators sold into the rally, cutting approximately 13,000 contracts with a positioning score of only 12 points, indicating the move is driven by fundamentals rather than speculative excess and that a large crowd remains on the sidelines.